SORA: How Singapore’s Benchmark Interest Rate Transition Affects You
In line with global interest rate reforms on interest rates, the two benchmark Singapore dollar (SGD) rates that many borrowers are familiar with – the Singapore dollar swap offer rate (SOR) and the Singapore Interbank Offered Rate (SIBOR) – are being phased out. Over the next two years, the Singapore Overnight Rate Average (SORA) will replace SOR and SIBOR as the main benchmark interest rate for variable rate loans in SGD.
SOR will be discontinued after June 30, 2023. SIBOR will be phased out over the next few years, with six-month SIBOR discontinued after March 31, 2022, followed by one-month and three-month SIBOR after December 31. 2024.
In preparation for the transition, banks have stopped issuing SOR and SIBOR related loans since May 2021 and October 2021 respectively and have started issuing new SORA related loans. Existing clients with SOR-linked loans will need to convert to alternative packages, followed in due course by clients with SIBOR-linked loans.
THE NEW LANDSCAPE OF INTEREST RATES FOCUSED ON SORA
SORA is a transparent, robust and reliable benchmark administered by the Monetary Authority of Singapore (MAS). It is calculated and published daily on the basis of the day-to-day borrowing operations of banks among themselves.
For Mr. Wong Wei Siong, the SORA-related loan was his first loan deal for a newly purchased condominium. The 31-year-old customer success manager said his interest rate was calculated at 0.92%, based on a three-month compound SORA rate of 0.12%, plus a margin of loan of 0.80%. As a new buyer, he checked the interest rates against what is published daily by MAS on its website.
“Transparency is an important element in mortgage lending. The fact that the rates and calculations are all available on the MAS website is reassuring. Mr. Wong shared.
If you are considering taking out an SORA related loan, you should note that these loans usually refer to the compound SORA, which is the compound average of the daily readings of the SORA over a period of time (usually one, three, or six months). ).
This averaging effect smooths out daily fluctuations in interest rates, allowing more stable interest payments. Changes in the interest rate environment will always be reflected in the cost of servicing your loan, but this will happen more gradually over time.
Another new loan client linked to SORA is Mr. Chung Wan Thim. The 42-year-old computer trainer who works in legal departments said that while the rates on his new home loan are likely to change quarterly, “interest rates adjust more easily” over periods of interest. reason for using SORA compound.
TRANSITION TO SORA
While Mr. Wong and Mr. Chung are first-time borrowers, others with existing loans tied to the SOR will have to convert to alternative formulas. Retail borrowers with SOR linked loans can choose to subscribe to the SORA conversion package, which replaces their existing loans with a comparable loan based on a three-month SORA with no additional fees or lock-in period.
The SORA conversion package is designed to minimize interest rate differences at the time of conversion.
The line of credit that customers previously paid on their existing SORA loan is carried over to the newly converted SORA loan. For example, if your three month SOR included a 1% loan margin, the loan margin will remain the same under the SORA conversion package.
Also, since the SOR is usually higher than the SORA, an adjustment gap (retail) is added so that the overall rate of the SORA conversion package is broadly comparable to the original. SOR and SIBOR rates tend to be higher than SORA because they incorporate risk premiums to compensate for the uncertainty of lending money over a period of time, while SORA is based on overnight transactions. Over the past five years, the three-month compound SORA, which is now widely used in home loans, has been about 0.30 percentage points lower on average than the three-month SOR.
Besides the SORA conversion package, customers can also choose to upgrade to other loan packages offered by their bank. They may however be subject to the general conditions in force, such as a blocking period.
Additionally, as a one-time exception to ease the transition to abandonment of SOR, MAS will not require banks to recalculate the Total Debt Service Ratio (TDSR) for affected customers making the switch. within the same bank.
Customers who decide to switch to alternative loan formulas with other banks can check whether they will be exempt from the TDSR rules. For example, homeowner borrowers are exempt from the TDSR rules when they refinance their home loans with other banks.
For those who are currently managing a loan that references SOR or SIBOR at six months, you should contact your bank as soon as possible to switch to another loan package that meets your needs. For others who have one-month or three-month SIBOR-referenced loans, your bank will contact you in due course to guide you in replacing your existing SIBOR-linked loans.
Learn more about the switch to SORA.